WASHINGTON/NEW YORK, Jan 31 The U.S. government
has filed a lawsuit seeking to stop Anheuser-Busch InBev SA
from buying the half of Mexican brewer Grupo Modelo
that it does not already own, saying the $20.1
billion deal could mean higher U.S. beer prices.

The government's move calls into question the future of one
of the biggest deals of 2012 and a related deal that was set to
change the fortunes of the world's largest wine company,
Constellation Brands Inc. Shares of all three companies
fell sharply on the news.

Despite a huge array of beers on store shelves, the beer
market is dominated by two big players.

The top seller is AB InBev, which has 200 brands ranging
from big names like Budweiser and Stella Artois to craft-style
beers like Shock Top and Goose Island. The No. 2 player is
MillerCoors, a joint venture between SABMiller Plc and
Molson Coors Brewing Co.

This market dominance would seem to give the big companies
the power to raise prices. But, when they did, the smaller
Modelo, with its popular Corona beer, often refused and took
market share, the Justice Department said.

For example, Modelo declined to raise prices in California
in 2010 and was "eating (Budweiser's) lunch," according to an AB
InBev document quoted in the Justice Department complaint aimed
at stopping the proposed transaction on the grounds that it
breaks antitrust law.

AB InBev, which announced the deal for Modelo in June, said
it will fight the Justice Department in federal court and called
its decision to sue "inconsistent with the law, the facts and
the reality of the market place."

Trading in Constellation Brands, which would have become
sole owner of the company that distributes Modelo beers, was
halted after it dropped 23.8 percent. It later resumed and
closed down 17.4 percent at $32.36.

AB InBev's stock was the worst performer in the FTSEurofirst
300 index of leading European blue-chips,, closing down
7.8 percent at 63.90 euros, just above a three-month low hit
shortly after the Justice Department's statement.

Shares of the Mexican brewer Grupo Modelo, the largest in
the country, fell to a seven-month low, down 9.5 percent to 105
pesos on the Mexican exchange. It later recovered a bit and
ended the day at 108.50 pesos.

IS IT DEAD?

"This is a very well drafted complaint with quotes from what
appear to be very damaging documents along with solid market
share data," said Rob Davis, an antitrust attorney with Venable
LLP. "If the division is able to prove what they say they can,
then this looks like a very hard case for the parties to win."

A second expert agreed, but cautioned: "AB is going to have
arguments. And I don't know what they are....This is a serious
complaint by a very serious assistant attorney general."

A court battle could drag on for months, during which time
deals often fall apart.

The lawsuit potentially pits the Justice Department's
antitrust division against a recent former chief of that
division, Christine Varney, who stepped down in 2011 to return
to private practice and was among the lawyers who counseled
Modelo, according to her law firm's website.

Like others who leave government service, Varney was seen as
a catch for her new firm, Cravath, Swaine & Moore, in part
because of her expected ties to those still in government.

In 2011, the Justice Department allowed VeriFone to buy
Hypercom in a settlement that it reached after suing to block
it.

AB InBev, formed in 2008 when InBev bought Anheuser Busch,
was the top U.S. brewer with 47 percent of the U.S. beer market
going into the Modelo deal.

Because of its size the company meticulously crafted an
agreement under which AB InBev would sell Modelo's 50-percent
stake in Crown Imports, its U.S. distributor, to Constellation
Brands for $1.85 billion. Constellation was already Modelo's
partner in Crown.

Grupo Modelo is the top beer maker in Mexico. It also makes
Negra Modelo and Pacifico.

AB InBev said that since it would sell Modelo's stake in
Crown, its U.S. market share would be unchanged.

Through ownership of Crown, Constellation Brands would have
control of the Modelo beers in the United States, including
pricing, marketing and distribution. But it would buy the beer
from AB InBev, and critics note that a seller usually bases
their retail pricing on the cost of its products.

The supply of that product, beer, is governed by an
agreement between Crown and Modelo.

NOT BUSINESS AS USUAL

In a document cited in the Justice Department complaint, an
ecstatic Crown CEO Bill Hackett wrote to his employees after the
deal was announced, "Our No. 1 competitor will now be our
supplier. ... it is not currently or will not, going forward, be
'business as usual.'"

Bill Baer, assistant attorney general in charge of the
Department of Justice's Antitrust Division, said that AB InBev
had been told with a telephone call on Thursday morning that the
department would file a lawsuit to stop the transaction.

"We had frank and candid discussions," he said. "We were
just too far apart."

The deal is also opposed by small brewers, who were
concerned that a more powerful competitor could make it harder
for them to get their beers distributed.

Beverage industry consultant Tom Pirko, of Bevmark
Consulting in Santa Barbara, California said he thinks AB InBev
should be able to reach a deal with the government if it agrees
to change the supply agreement to allow for stricter price
management.

"How do you strengthen that provision to make absolutely
certain that the control of pricing on the shelf is such that
they can't use Crown as a pawn?" he asked.

Constellation, one of the world's largest wine companies,
will be the big loser if the deal falls apart, said Morningstar
analyst Kenneth Perkins.

"I think ABI probably anticipated some pushback so they
probably have a Plan B and a Plan C," he said. "The downside for
Constellation is more significant. The Crown deal was pretty
good for them. This would be a huge loss."

But Andrew Holland, a drinks analyst at Societe Generale,
noted that the major attraction of the deal was that AB InBev
hoped to take advantage of Modelo's fast-growing Mexican
business.

"If the deal fails it's awful. I'm sure they will try to
find something that satisfies the DOJ," he said.

The case was filed in the U.S. District Court for the
District of Columbia. It is United States of America v.
Anheuser-Busch InBev and Grupo Modelo. The case is No.
13-cv-00127.

Dec 9 Michigan startup company Rivian Automotive
has agreed to purchase the former Mitsubishi Motors
plant in Normal, Illinois, and reopen the factory in about five
years, the city's mayor said on Friday.

Reuters is the news and media division of Thomson Reuters. Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Learn more about Thomson Reuters products: